When a Firm Announces Its Accounting Irregularities: A Status-based Approach a nd S ignal ing Theory
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Purpose: This study aims to examine the role of firm status and financial performance when a firm's wrongdoing, such as accounting irregularities, is disclosed. This study also examines proactive confession of wrongdoing (e.g., self-reporting of accounting irregularities) and its impact on the consequences of disclosing wrongdoing. Design/methodology/approach: We ran a regression analysis using 441 observations of firms' accounting irregularities in the U.S. business service (SIC codes 73XX) industry. We collected data from the U.S. General Accounting Office, WRDS Compustat, WRDS Execucomp, WRDS CRSP database, and SDC Platinum. After conducting the main analysis, we ran a robustness test (variance inflation factor test) and a post-hoc analysis (two-way ANOVA). Findings: A firm's high-status backfires in the stock market when its accounting irregularity is disclosed. However, this negative effect can be alleviated if the focal firm proactively self-reports its accounting irregularities. Moreover, a focal firm's strong financial performance can positively affect the stock market's reaction after the disclosure of accounting irregularities. Research limitations/implications: This study relies on only one industry, which may affect the generalizability of the research. Moreover, this study focuses only on the reactions of stock market investors in the case of disclosed wrongdoing. Future research should extend this research by using observations from other industries and by focusing on the reactions of various stakeholders. Future research could also address the unsupported hypothesis of this study, which suggests the moderating effect of confession on the relationship between a firm's financial performance and stock market reaction after the disclosure of accounting irregularities. Originality/value: This study contributes to the research on status and research on financial restatements by demonstrating how high-status and superior financial performance affect the stock market reactions from signal receivers (investors) after the disclosure of negative news, and how self-reporting may alleviate the adverse impacts.
Abstract
Purpose: This study aims to examine the role of firm status and financial performance when a firm's wrongdoing, such as accounting irregularities, is disclosed. This study also examines proactive confession of wrongdoing (e.g., self-reporting of accounting irregularities) and its impact on the consequences of disclosing wrongdoing. Design/methodology/approach: We ran a regression analysis using 441 observations of firms' accounting irregularities in the U.S. business service (SIC codes 73XX) industry. We collected data from the U.S. General Accounting Office, WRDS Compustat, WRDS Execucomp, WRDS CRSP database, and SDC Platinum. After conducting the main analysis, we ran a robustness test (variance inflation factor test) and a post-hoc analysis (two-way ANOVA). Findings: A firm's high-status backfires in the stock market when its accounting irregularity is disclosed. However, this negative effect can be alleviated if the focal firm proactively self-reports its accounting irregularities. Moreover, a focal firm's strong financial performance can positively affect the stock market's reaction after the disclosure of accounting irregularities. Research limitations/implications: This study relies on only one industry, which may affect the generalizability of the research. Moreover, this study focuses only on the reactions of stock market investors in the case of disclosed wrongdoing. Future research should extend this research by using observations from other industries and by focusing on the reactions of various stakeholders. Future research could also address the unsupported hypothesis of this study, which suggests the moderating effect of confession on the relationship between a firm's financial performance and stock market reaction after the disclosure of accounting irregularities. Originality/value: This study contributes to the research on status and research on financial restatements by demonstrating how high-status and superior financial performance affect the stock market reactions from signal receivers (investors) after the disclosure of negative news, and how self-reporting may alleviate the adverse impacts.